The Ukraine war is fought in two economic and military fields. In addition to delivering weapons to Ukraine, the Western countries led by the United States have weaponized their financial system against Russia’s economic sectors.
Impacts of sanctions
The Western sanctions have so far targeted a wide area of Russia’s economy. Expelling Russia’s major banks from SWIFT and blocking the Russian central bank’s funds abroad, including 630 billion dollars of the country’s foreign currency reserve, are among the most important decisions taken so far against Moscow.
The sanctions, especially in the initial stages, delivered blows to the Russian economy and their negative impact is expected to continue for the months to come. For instance, inflation in Russia accelerated to the 20-year high of 17.3 percent last month, according to the Federal State Statistics Service Rosstat.
The restrictions imposed by the West cause Russia’s ruble to severely lose value against the US dollar, so that it dropped to 0.0073 dollars per a ruble. The Russian official currency has bounced and regained its pre-war value to some extent after the Russian central bank’s more than double the interest rate to 20 percent. However, some experts warn that the strengthening is artificial and the currency could lose value any minute.
The thing is that sanctioning Russia, as the 11th largest economy of the world, is different from targeting a small economy like Myanmar and it will impact the sanctioning countries, too.
Oil price rise, shortage of phosphate for fertilizers, and shortage of nickel needed for electric car batteries are among the short-term consequences of confrontation with Russia. What’s more, Russia and Ukraine provide over 30 percent of the world’s wheat supply.
Apart from the short-term impacts, developments in Ukraine have more important consequences that will emerge in the long-run and signal the end of a season and the start of a new one in the international relations.
The economic sanctions against Russia, as said by many experts, could collapse the current US- and West-centric financial system and take the sanctions weapon out of their hands forever.
Basis of economic sanctions
Henry Farrell and Abraham Newman compared the post-Cold War global financial system to a “hub and spoke” system whose hubs have been located in Western countries. Large banks in the world, the US dollar, and financial infrastructure are to large extent under the control of North American and West European countries.
The dollar, as the infrastructure of the global economy, the main currency in most international exchanges, the global financial calculations unit, and the reserve currency, is one of the main hubs of such a system.
But the US has misused the asymmetric relationship with the global economy and, as Ian Bremmer, American economist, has likened the financial system to a weapon used against the countries opposing US foreign and security policies.
In other words, the Americans and Western countries consider themselves as the goalkeepers and the legitimate owners of the international economic system and have subjected access to the system to alignment with their policies.
In the meantime, the international financial institutions play the role of arms for the West instead of acting as non-political profitable entities.
The global economy has created value chains in the world that require overseas transactions and loaning for any stage of production. In such a system, access to global financial infrastructure (organizations like SWIFT( is of increasing importance in business operations. This is what the US sanctions are founded on.
The Western countries have used sanctions in the 21st century with more confidence and have been willing to target a nation in whole. However, the very approach has weakened the West-led financial system.
Sanctions and dollar hegemony
After the US repeatedly used sanctions against various countries, including Iran, under different pretexts, some circles in the West raised the question that exhausting sanctions could demolish the West-led system and dollar hegemony.
The thing is that the global financial institutions don’t owe their current status to any Western property, but their status is a result of their being a part of a big global network. Asian business people don’t use Western financial system because they are Western, they use them because the system is easier to use and more efficient.
However, the US overuse of sanctions in the 21st century has undermined confidence in this network for the first time. It turned out that Washington could easily restrict or cut other countries, financial institutes or individuals’ access to dollar transactions to advance their internal policies and goals.
Countries like China and Russia have therefore begin to think of an alternative financial system. Russia launched SPFS in 2014 and China introduced CIPS in 2015 as the alternatives of SWIFT.
This attitude has not only been seen in the countries targeted by the sanctions, but also was witness in third countries who had to comply with secondary sanctions. More interestingly, after Europeans reached disagreement with the US in Donald Trump era on anti-Iran sanctions, they began to consider an independent path of sanctions usage through enactments like the proposal on the protection of the EU and its member states from economic coercion by third countries.
Before the Ukraine war and imposing sanctions against Russia, however, the US tried to introduce the sanctions against Iran and some other countries as exception in order to prevent such agendas or at least decelerate them.
But sanctioning Russia, as a permanent member of the US Security Council with larger economy in comparison to previously sanctioned states, raises the notion that even big powers could be targeted with extensive, comprehensive sanctions.
“Put your money in our banks, we can confiscate it; put your assets in our territory, we can steal them; use our money and we can cancel it; put your yacht in our harbour, we can pirate it; put your gold in our vault, we can grab it. That is a lesson that will resound around the world. A naked illustration that the “rules-based international order” is simply that we make the rules and order you to obey them,” writes Patrick Armstrong in a memo on his weblog.
Western hegemony in the war quagmire
This situation is likely to accelerate a long-running process of weakening Western financial institutions and make a wealthier group of countries think of undermining sanctions weapon, as there is no guarantee that other countries will be exempted from what happened to Russia. As mentioned earlier, such a process has already begun among some of America's European allies, but is now more likely to accelerate and become more operational.
The growing concern of Western institutions and media about such a development as a result of the Ukraine war has been evident like never before. For example, First Deputy Managing Director of International Monetary Fund Gita Gopinath warned on April 11 that sanctions against Russia could lead to a fragmentation of monetary reserves and reduce the global dominance of the dollar.
“The dollar would remain the major global currency even in that landscape but fragmentation at a smaller level is certainly quite possible,” she said in an interview with the Financial Times. “We are already seeing that with some countries renegotiating the currency in which they get paid for trade.”
The war would also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies, she added.
Just one day later, US bank Goldman Sachs has warned the US dollar faces risks that could erode its global dominance as a result of strict sanctions against Russia, saying it's dealing with some of the same challenges that the British pound faced in the early 1900s.
In addition to factors such as the relatively small share of the US in global trade compared to the dominance of the dollar in global payments, the bank has mentioned the rising foreign debts of the US and the geopolitical problems, such as Russia's war in Ukraine, among the reasons that could convince central banks to move towards diversification of their currency reserves.
International investors became more and more reluctant to hold the British pound after the country racked up major debts in World War II, the Goldman analysts said.
"If a reserve currency issuers' debt is allowed to grow relative to GDP, eventually foreigners may grow reluctant to hold more of it," they wrote.
That’s why many reports have appeared in recent days that some countries are seeking to create new exchange and pricing ratios for their business transactions. In one instance, Saudi Arabia has been reported to be planning to price a part of its oil exports to China in yuan.
That’s “a noteworthy step as the Saudis have been selling oil exclusively in dollars since 1974,” says Andrew Stuttaford, an economic expert, in National Review.
The emergence cryptocurrencies is another mechanism that has seriously increased the risk of transition to alternative payment systems. “Cryptocurrencies are much younger than legacy currencies, but their use is growing gradually in the world,” said Ernesto José Molina, a member of Cuban Academy of Sciences.
"The use of cryptocurrencies as a means of payment reflects the rejection of the dollar dominance as a global currency. The European Union has begun developing digital euro and its central bank is also considering using yuan as a reserve currency" he added.
Bitcoin use in Russia is said to have grown significantly in the past three months. The Spanish newspaper El Economista recently wrote that the most powerful state of the world, the US, has caused expansion of the use of digital assets, because citizens see such assets as a hedge against losing purchasing power and a way to circumvent coercive measures.
European journalist Laura Lluch wrote in an article in Euronews that banks play an important role when a country invokes to sanctions against another state, as they resemble the eyes that see anything. Banks monitor money transfers, she said, while cryptocurrencies blind the banks, the crypto market reports to no superior entity and no one is there to monitor transactions.
That is why countries like Russia see cryptocurrencies as a free, anonymous mechanism to avoid dollar hegemony and disarm the US’ financial and economic sanctions. The battle to overthrow the US dollar has long begun and the war in Ukraine will intensify it.
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